Refund anticipation loan

A refund anticipation loan (RAL) is a high interest rate short-term loan secured by a taxpayer’s expected tax refund, and designed to offer customers quicker access to funds than waiting for their tax refund.

United States

In the United States, the taxpayers commonly apply for refund anticipation loan through a paid tax preparation service, which charges a fee for each loan originated. In the United States the Internal Revenue Service rules prohibit basing this fee on the amount of the expected refund. The banks through which the loan is made charges interest or finance charges.

According to the National Consumer Law Center, 12 million taxpayers used an RAL in 2004. [cite web|url=http://msnbc.msn.com/id/11362964/|title= E-filing can make high-fee loans unnecessary - Tax Tactics |publisher= MSNBC.com] With e-filing and IRS partnerships that help consumers e-file for free, U.S. taxpayers can receive their tax refunds within three weeks and as quickly as ten to fourteen days if choose to receive their refund via direct-deposit. This has rendered RALs less attractive to some. [cite web|url=http://www.bankrate.com/brm/itax/news/20010131b.asp|title= Cheaper and still fast alternatives to refund anticipation loans]

History

RALs began with the IRS's introduction of electronic filing in the mid 1980s as a way to decrease its cost of operation.

A tax preparer would, within 24 hours of submission, receive from the IRS confirmation that the submission was free of mathematical errors, and that the filer had no liens or delinquent federal student loans. This meant that there was 100% chance that the IRS would pay the refund within weeks, barring fraudulent income reporting. At that point the preparer would issue the filer a check for the amount of the expected refund minus a commission. In 1995, the New York Times reported that Beneficial's $30 electronic filing fee and $59 loan fee amounted to a 250 percent APR on a refund of $1,000.cite web|title=http://query.nytimes.com/gst/fullpage.html?res=990CE5DB123AF931A15751C0A963958260 |title=COMPANY NEWS; Bank Challenges I.R.S. on Refunds for Borrowers |publisher= New York Times]

By the early 1990s, exploitation of the system began; filers misreported their income to inflate their refund. As a result of this, and also to discourage filers from this rather uneconomical offer, in 1994 the IRS stopped providing tax preparers a confirmation that a deposit would take place for a certain amount and that it would begin sending refunds directly to taxpayers instead of banks that made the loan, but not having the desired effects, the confirmations were re-instated the following year.

Since 2004 the IRS has been developing the new processing system CADE. [cite web|url=http://www.irs.gov/privacy/article/0,,id=172964,00.html |title=Customer Account Data Engine 2.2|accessdate=2008-08-05|publisher=Internal Revenue Service] Once fully functional it will be able to process tax returns in as little as one day giving taxpayers access to their refunds within 2-3 days. Once fully online it is thought that this system will eliminate the need for refund loans. [cite web|url=http://www.gcn.com/online/vol1_no1/35458-1.html |title=IRS' CADE reaches the 1 million mark this tax season] Although beset by regular setbacks due to funding [cite web|url=http://www.irs.gov/newsroom/article/0,,id=111900,00.html|title= IRS Delays Key Technology Program Until 2004 Filing Season|accessdate=2008-08-05|publisher=Internal Revnue Service] CADE is expected to be fully functional in 2012.

Controversy

According to the Consumer Federation of America and the National Consumer Law Center, RALs are controversial because, like payday loans and title loans, RALs are high-profit, low-risk loans marketed toward the working poor. A 2006 study by the NCLC and the Consumer Federation of America found that "Based upon the prices for RALs in 2006, a consumer can expect to pay about $100 inorder to get a RAL for the average refund of about $2,150 from a commercial tax preparation chain this year." [cite web|url=http://www.consumerlaw.org/news/content/2006RALReport.pdf|title=The NCLC/CFA 2006 Refund Anticipation Loan Report| author=Chi Chi Wu, Jean Ann Fox & Patrick Woodall| publisher= Consumer Federation of America & National Consumer Law Center|year=2006|pages=7|accessdate=2008-06-06]

Supporters of the practice say the loans allow people access to funds immediately in cases of an emergency such as overdue medical bills, credit payments, and other debts while they wait for the IRS to process their income tax return.However, this argument is misleading:Fact|date=August 2008 taxpayers can file form W-4 to adjust their withholdings to the correct level.When this is done, a taxpayer can hold on to all cash that would be offered by an RAL without paying any fee, thereby making the cash available at any time. [cite web|url=http://www.irs.gov/individuals/article/0,,id=96196,00.html|title= IRS Withholding Calculator] Supporters of RALs may contend that the high fees are justified by the high risk associated with these loans, since there is a possibility that the IRS will issue a reduced refund or none at all, depending on whether the taxpayer followed the correct procedures in calculating his or her tax.Fact|date=August 2008

Opponents of RALs, like as the National Consumer Law Center, argue that the profit motive of the lender results in RALs being issued too often to low-income individuals who are made to believe the wait for their refund is longer than it really is, who do not realize they are taking a loan, do not understand the high interest rates charged by the loan (often exceeding 100% APR), and who do not actually need the funds immediately. [cite web|url=http://www.bankrate.com/brm/itax/news/20030127a1.asp?caret=6|title= The high price of refund anticipation loans] An empirical study at Georgetown University found that a large percentage of RAL customers appear to use limited decision processes. [cite web|url=http://www.business.gwu.edu/research/centers/fsrp/pdf/M37.pdf |title= RAL monograph-final _with corrections__1_revised June 27]

More than half of all RAL consumers are low-income recipients of the Earned Income Tax Credit (EITC); in 2006, the NCLC estimates RAL loans cost RAL recipients $1.24 billion (USD) in loan fees and another $360 million in administrative, electronic filing and application fees. [cite web|url=http://www.bankrate.com/brm/itax/news/20030127a1.asp|title= The high price of refund anticipation loans]

In 2002, H&R Block settled a lawsuit brought by the New York City Department of Consumer Affairs for predatory lending practices with regard to RALs and the EITC.Fact|date=February 2008

tate crackdown on refund loans

In 2003, the Illinois Attorney General issued a detailed warning to taxpayers about such loans.Fact|date=February 2008

On February 15, 2006, the California Attorney General, Bill Lockyer, sued H&R Block over its refund anticipation loan business, [cite web|url=http://msnbc.msn.com/id/11373754/ |title=California sues H&R Block over tax refund loans|publisher=MSNBC|date= 2006-02-15] citing interest rates exceeded 500%, including fees (which included the tax preparation fee, which is unrelated to the RAL, but included per California law). Lockyer said the company falsely portrayed the nature of the loans, advertising "cash, cold, green, in your hand, out the door."

In May 2005, a federal judge in Chicago rejected a $360 million settlement as inadequate. [http://msnbc.msn.com/id/11373754/]

Under the National Bank Act, national banks and their agents who make RALs are broadly excluded from regulating RALs. The only actions that states bring against RAL providers involve allegations of falsely portraying the circumstances of the loan, or fraud. A RAL is a legal loan beyond the scope of the ability of any state agency or state legislature to regulate as a matter of federal law.Fact|date=August 2008

RALs are within the legislative scope of the United States Congress and to a considerably lesser extent the regulatory authority of the IRS; however, Congress has not demonstrated serious interest in this subject and while the IRS did issue a "Advance Notice of Proposed Rulemaking" in January 2008 that would prevent the tax preparer from sharing tax return data with the lending bank, the advance notice was very poorly received on Capital Hill because of implications that it would have had for other types of loans where tax returns, tax return data, and CPA statements are used as part of a loan decision package.

Canada

In Canada the process is referred to as "tax rebate discounting", where a tax preparation firm purchases the right to the anticipated refund in exchange for a percentage of the refund amount. Canada Revenue Agency rules establish the maximum discounting fee as 15% of the first 300 C$ and 5% of any remaining amount. No other fees for preparation or filing the return are permitted. This commonly works out to a high effective interest rate, although in a small number of cases the discount may be comparable or even less than an ordinary tax return preparation fee.

References

Articles

* [http://www.chicagotribune.com/business/yourmoney/chi-ym-started-0316_mar16,0,1010871.story "Instant refunds no bargain"] , "Chicago Tribune", March 16, 2008
*http://www.usatoday.com/money/perfi/general/2006-09-17-refund-loans-usat_x.htm
* [http://msnbc.msn.com/id/11362964/ "E-filing can make high-fee loans unnecessary"] , MSNBC, 2006-02-15

External links

* [http://msb.georgetown.edu/faculty/research/credit_research/pdf/M37.pdf Consumer Use of Tax Refund Anticipation Loans] , Gregory Elliehausen, McDonough School of Business, Georgetown University, April 2005.
* [http://www.nclc.org/initiatives/refund_anticipation/ National Consumer Law Center: Refund Anticipation Loans]
* [http://www.consumeraffairs.com/finance/hr_block_ral.html Consumer Complaints About H&R Block Refund Anticipation Loans]
*http://www.responsiblelending.org/issues/refund/
*http://www.consumerfed.org/pdfs/RefundAnticipationLoanReport.pdf
*http://www.consumerlaw.org/issues/refund_anticipation/content/RAL_final.pdf
*cite web|url=http://www.responsiblelending.org/issues/refund/|title=Refund Anticipation Loans|publisher=Center for Responsible Lending|accessdate=2008-08-03